Washington, DC — NASD announced today as part of its ongoing efforts to curb abuses in the sale of variable products, that it has censured and fined InterSecurities, Inc. of St. Petersburg, Florida, $125,000 for having inadequate procedures and systems governing its sale of variable products and its handling of customer complaints. In addition, in three separate enforcement actions, not related to the InterSecurities matter, NASD announced that it filed complaints against individuals for unsuitable sales of deferred variable annuities.
"There has been a dramatic increase in sales of variable products in the last several years and the marketing efforts used by some variable annuity sellers deserve scrutiny - especially when seniors are the targeted investors," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "Sales pitches that confuse or frighten investors violate NASD rules and will be the subject of enforcement action." For this reason, NASD today issued an Investor Alert to help investors better understand variable annuities before purchasing one.
InterSecurities was charged with failing to adequately address customer complaints that were made against it. As an affiliate company of InterSecurities, Western Reserve Life Assurance Co. of Ohio (WRL) received nearly all customer complaints concerning InterSecurities' sales of variable products. Because WRL determined whether each was a "complaint," InterSecurities failed to have records of all complaints and report them to NASD as required by NASD rules.
InterSecurities also did not have procedures in place to ensure the proper registration, training or supervision of individuals that handled customer complaints, adequate guidelines for customer complaint investigations or adequate reviews of its complaint handling process. In addition, over the course of more than four years, InterSecurities had inadequate procedures and systems governing the sale of variable products. In settling these matters, InterSecurities neither admitted nor denied NASD's findings.
In other enforcement actions announced today, NASD filed three separate complaints against individuals for unsuitable sales of variable annuities. They include:
- Ralph T. Grubb, at the time employed by Banc of America Investment Services, Inc., was charged with an unsuitable sale of a deferred variable annuity to an 18-year-old high school senior who was seeking a safe investment for a $30,000 legacy while in college. When she graduated from college, she intended to use the funds for a down payment on a house or to buy a car. However, the annuity contract was subject to a ten percent additional tax on distributions prior to age 59 ½ and carried surrender charges that would have still been in effect when she intended to liquidate her investment. The complaint also alleges that Grubb's recommended allocation of 100 percent of the customer's premium to one equity sub-account within the annuity was unsuitable in relation to the customer's risk tolerance, and that the customer had no need for the death benefit feature of the annuity because she was unmarried and had no dependents. Moreover, the customer was in the lowest marginal tax bracket and had no need for tax deferral, a principal reason that people purchase variable annuities. The complaint further alleges that Grubb made an unsuitable sale of a deferred variable annuity to the customer's father for the investment of a legacy received by the customer's 16-year-old sister.
- Kevin S. Jones was charged with an unsuitable switch of variable annuities. At the time, Jones was employed at Raymond James and Associates, Inc. The customer, a self-employed rancher, needed access to her funds and had an investment time horizon of two to seven years. During the sixth year of her ownership of a $300,000 variable annuity, Jones recommended that she switch to another variable annuity in the amount of $315,000, for which Jones received a commission of $8500. The original variable annuity would have allowed the customer penalty-free access to her money in eight months, but the switch resulted in limited access to her investment for the next nine years. The switch also caused the customer to pay a $1600 surrender fee. The complaint further alleges that the switch resulted in no significant improvement in the death benefit for the customer and caused the customer to pay substantial increased annual costs. Over a six-year period, these increased costs depleted the $15,000 bonus offered by the second variable annuity.
- Gregory Hunter of Edward Jones, Inc., was named in the third action and charged with an unsuitable sales transaction. In this case, the customer had a portfolio worth approximately $250,000 that generated monthly income averaging approximately $1,500. Hunter recommended and sold to this customer a $60,000 deferred variable annuity by liquidating a portion of her portfolio. The net effect of the transaction was that the customer's portfolio now generated monthly income that was insufficient to cover her monthly expenses requiring the customer to make regular monthly withdrawals of $360 from the annuity for living expenses. Given the customer's need for current income and the fact that she did not need benefits offered by a variable annuity such as tax deferral or a death benefit, the transaction was unsuitable.
Under NASD rules, individuals and firms named in complaints can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from NASD.
These cases are the latest in a series of special examinations conducted by NASD that focused on the sale of variable contracts.
NASD has issued alerts to both firms and investors to help ensure that these products are properly sold which can be found at:
- Should You Exchange Your Life Insurance Policy?
- NASD Notice to Members 99-35, and
- NASD Notice to Members 00-44.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web Site at www.nasdr.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business -- from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.